Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see China Unicom (Hong Kong) Limited (HKG:762) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 1st of June, you won't be eligible to receive this dividend, when it is paid on the 19th of June.
China Unicom (Hong Kong)'s next dividend payment will be HK$0.15 per share. Last year, in total, the company distributed HK$0.15 to shareholders. Last year's total dividend payments show that China Unicom (Hong Kong) has a trailing yield of 3.6% on the current share price of HK$4.47. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately China Unicom (Hong Kong)'s payout ratio is modest, at just 42% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 11% of its cash flow last year.
It's positive to see that China Unicom (Hong Kong)'s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. China Unicom (Hong Kong)'s earnings per share have fallen at approximately 6.9% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. China Unicom (Hong Kong) has seen its dividend decline 0.8% per annum on average over the past ten years, which is not great to see.
Has China Unicom (Hong Kong) got what it takes to maintain its dividend payments? China Unicom (Hong Kong) has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of China Unicom (Hong Kong)'s dividend merits.
While it's tempting to invest in China Unicom (Hong Kong) for the dividends alone, you should always be mindful of the risks involved. For example, we've found 2 warning signs for China Unicom (Hong Kong) that we recommend you consider before investing in the business.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.